Purchase orders and proforma invoices are two of the most widely used documents in the manufacturing business. These two documents contain similar information but have different purposes in business transactions. As a manufacturer, you should know the differences between these financial documents used in the supply chain.
It is especially important for you to understand purchase order vs proforma invoices if your business involves frequent purchase management. In this blog post, we will learn the differences between them, their meanings, benefits, and examples to improve our understanding of documents that are useful in the supply chain.
What Is Purchase Order?
The simple purchase order meaning is creating a formal request to buy goods or services from a seller. It contains a finalized price and a unique invoice number for tracking purposes. It is an important part of your procurement processes. Errors here can result in financial losses.
To make a purchase order, you need to conduct an inventory analysis. It helps you know which products and what quantity you require for manufacturing. You also have to mention the terms and conditions, order dates, shipping address, etc., in the purchase orders. This is prewritten, pre decided information that you can reference later to keep track of your procurement activities.
What Information Does Purchase Order Contain?
In this part of our purchase order vs proforma invoice analysis, we will understand the information a purchase order contains.
- Product Lists
- Product Quantities
- Order Prices
- Vendor Name
- Vendor Address
- Shipping Address
- Billing Address
- Specific Terms and Conditions.
- Delivery Due Date
When Does A Company Use Purchase Orders?
Companies use a Purchase order in many scenarios. Here are the most common uses of a PO:
1. Formalizing Buying: Companies use PO to formalize their buying process. This is especially useful for SME manufacturers where purchases need to be tracked and approved by different departments.
2. Tracking Expenditures: Each PO has a unique number that can be used to match invoices and delivery receipts. This helps to keep track of what has been ordered and received.
3. Legal Protection: POs also serve as a legal document that outlines exactly what a company has ordered. If a dispute arises with a supplier, a PO can be used as evidence.
4. Orders Budgeting: POs are used in budgeting as they provide a record of what has been ordered. This can help companies plan their budgets more effectively.
5. Inventory Auditing: After receiving the delivery, POs can be used for information that the management team can use to verify and audit inventory and transactions.
Key Benefits Of Purchase Orders?
POs are important documents for businesses that help you track your material orders. Here are the key benefits of purchase orders that you can have for your manufacturing business:
- POs help you avoid misunderstandings with your suppliers by keeping accurate historical data.
- POs are legal documents that contain the terms and conditions of your procurement with your suppliers.
- POs help you optimize your inventory and prevent stockouts to avoid disruptions in your production.
- POs help you analyze your expenses on certain products or raw materials so that you can identify the most used and valuable items for your business.
- POs improve visibility over your purchasing activities and financial transactions so that you can manage your budget more efficiently.
Purchase Orders Examples
Let's understand purchase orders more easily with an example given below.
Suppose you have set a target and increased the production rate to fulfill a rush order in your manufacturing business. Now, if you don’t have enough raw materials in stock, you have to make a purchase order and send it to your suppliers to get them on time. You have to include the names of raw materials, their quantities, shipping addresses, vendor details, and the terms and conditions in the purchase order.
Once you send the POs to your suppliers, it becomes a formal and legal document for your procurement. Packaging materials, machines, or tools are good purchase order examples. All of these components are helpful in achieving your production targets and improving order fulfillment.
What Is Proforma Invoice?
A proforma invoice, is derived from the Latin phrase “as a matter of form”. The simple proforma invoice meaning is creating a document of the initial bill of sale by seller. It is sent before the delivery of goods as a response to the purchase order shared by the buyer. An ideal proforma invoice contains an itemized list with a price estimate and detailed information about the goods.
The main difference between proforma invoice vs purchase order is that a PO is sent by a buyer, whereas a proforma invoice is sent by a seller. PO becomes a legally binding document once the supplier accepts it. On the other hand, a proforma invoice includes estimations that can be negotiated.
What Information Is Required In A Proforma Invoice?
The confusion between proforma invoice vs purchase order documents occurs because of the similar information they include. A proforma invoice contains the following information:
- Date of Issue
- Seller’s Contact
- Buyer’s Contact
- Description of Goods
- Quantity
- Price
- Taxes and Fees
- Shipping Costs
- Total Amount Due
Why Do Businesses Use Proforma Invoices?
When Does A Seller Issue Proforma Invoice?
A proforma invoice is an important document because of its purpose. A seller issues a proforma invoice in the following cases:
1. Before the Sale: A proforma invoice is issued before the sale takes place. It is issued after the first discussion but before the final details of the deal are confirmed by the buyer.
2. As E-way Bill: Proforma invoices are often used as E-way bills for transportation. They provide an estimate or quotation for goods before they are shipped.
3. Setting Expectations: A proforma invoice can help the purchaser decide whether to go ahead with the order based on the costs, fees, and date of delivery it mentions or negotiate.
4. New Customers: Proforma invoices are particularly useful when two companies are doing business together for the first time.
Key Benefits Of Proforma Invoice?
To understand purchase order vs proforma invoice, you should know the benefits of both POs and proforma invoices. Here are the key benefits of proforma invoices that help you manage your procurement.
- They provide estimated prices for the demanded products or raw materials.
- They help in negotiating terms and conditions with the sellers to meet the needs of both parties.
- They allow buyers to make changes in their order requests as they are just preliminary bills.
- They improve visibility over the terms and conditions for the shipment of products or other requirements.
- They improve transparency in the purchasing process, which helps make informed decisions.
Proforma Invoice Examples
Let's go through the proforma invoice examples to easily understand its uses.
Suppose you make valves, bearings, and couplings in your company. Now, if someone wants to purchase these products from your company, they send you a PO detailing their requirements. After receiving the PO, you send them proforma invoices.
The proforma invoice should include your company’s name and address, buyer’s details, unit prices for each product, total costs, and other terms and conditions. When you provide all the required details, it can help you avoid misunderstandings after product delivery.
Key Differences Between Purchase Orders And Proforma Invoices
You can have a better understanding of purchase order vs proforma invoice analysis if you know their differences. Here are the differences that can help you identify and manage these documents more easily.
| Purchase Orders | Proforma Invoices |
|---|---|
| Purchase orders are the documents sent by the buyer to the seller with all purchasing details. | Proforma invoices are preliminary bills sent by the seller to the buyer for requested orders. |
| POs are legally binding documents once accepted by the seller. | Proforma invoices are not legally binding and can be modified if needed. |
| You have to make payments for your POs after the delivery of products. | You don’t have to pay proforma invoices because they are not the final bill. |
| POs are sent after the prices and other conditions for the procurement are agreed upon. | Proforma invoices contain estimated prices that you can negotiate with your suppliers. |
| POs help monitor the purchasing records and financial transactions with your suppliers. | Proforma invoices clarify the prices and other conditions to make informed purchasing decisions. |
When To Use Purchase Orders Vs. Proforma Invoices?
The purchase order vs proforma invoice analysis suggests that both PO and proforma invoice are important documents.
- You use POs when you have decided to procure certain raw materials with specified prices and terms and conditions.
- On the other hand, when someone shows interest in buying your finished goods, they send you a Proforma invoice to provide you with the estimated costs and other conditions.
Improve Your Document Management With TranZact
Errors or misinformation in purchase order vs proforma invoices can hurt your business. To avoid the possibility of errors and simplify your task, you can use software. TranZact is an easy-to-use software specially made for Indian SMEs. It can help you manage your valuable documents efficiently.
TranZact helps you keep historical records of your purchasing activities and your suppliers' details to make optimized POs. It also helps you engage with your customers to manage their orders more efficiently. Access TranZact now to get tailored features and fulfill all your specific document requirements.
FAQs
1. What is the difference between PO and PI?
The difference between a purchase order (PO) and a proforma invoice (PI) is that POs are sent by the buyers to the suppliers, while proforma invoices are sent by the sellers to the buyers.
2. Does the proforma invoice come before purchase order?
Yes, proforma invoices can be sent before purchase orders to avoid misunderstandings and improve accuracy. First, buyers show their interest in buying products or services, and then sellers send them proforma invoices with the required details.
3. What is the difference between order form and proforma invoice?
An order form is a document that shows the buyer's intention to buy certain products or services and a proforma invoice is kind of an estimated bill of those products or services that sellers send to the buyers.
4. What is PI in purchase order?
Performa invoice (PI) in a purchase order is a document that contains the estimated price of products, payment methods, buyers' and suppliers’ details, etc., to avoid misunderstandings.
5. Who sends the proforma invoice?
Sellers send proforma invoices to the buyers with all the product details, prices, delivery methods, and more.
6. What is difference between purchase order and invoice?
Purchase orders are formal documents shared by buyer or seller prior to processing orders. It contain product requirements, sellers and buyers information, and more details with payment terms and conditions. On the other hand, sellers send invoices to buyers after order fulfillment that contains product details, pricing, delivery, and more information.
7. Is PO and invoice the same?
No, a purchase order (PO) and an invoice are not the same because POs sent by buyers are documents that contain purchasing details, and invoices sent by sellers are documents that contain pricing details for certain orders.
8. What are the 3 uses of proforma invoices?
The three uses of proforma invoices are:
- Providing Estimated Costs
- Providing time for negotiations
- Avoiding misunderstandings
9. Can I pay a proforma invoice?
No, you don’t have to pay a proforma invoice because they contain estimated costs or products. You have to pay invoices that sellers send after fulfilling orders.
10. Why Do Businesses Use Proforma Invoices?
Businesses use proforma invoices to provide estimated costs and conditions to the buyers before confirming the order and delivering products. It gives buyers time to modify their orders to purchase the required products within budget limits.
